Acme United Corp (ACU) 2012 Q1 法說會逐字稿

Good day and welcome to the Acme United Corporation's first-quarter 2012 earnings conference call.

Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Walter Johnson, Chairman and Chief Executive Officer. Please go ahead sir.

Good morning. Welcome to the first-quarter 2012 earnings conference call for Acme United Corporation. I am Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read the Safe Harbor statement. Paul?

Forward-looking statements in this conference call, including without limitation statements related to the Company's plans, strategies, objectives, expectations, intentions, and adequacy of resources, are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including without limitation the following. One, the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company. Two, The company's plans and results of operation will be affected by the Company's ability to manage its growth, and three, other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission.

Thank you, Paul.

Acme United reported record sales in the first quarter of 2012 of $16.9 million, an increase of 17% over last year. Operating income increased from $183,000 in the first quarter of 2011 to $458,000 in 2012.

Earnings-per-share were $0.08 compared to $0.04 in the first quarter of 2011.

Sales in the first quarter were strong in the US and Europe with increases of 19% and 32%, respectively. Canadian sales were softer due to initial load-in of new products last year that are now shipping at normal rates.

We are having strong success with new iPoint pencil sharpeners, Clauss Professional cutting tools, and Pac-Kit first aid kits.

Our titanium and nonstick scissors are gaining new market shares in the Industrial and Craft segments.

Pac-Kit first aid kits continue to grow. Sales in the first quarter were $1.8 million, an increase of 35% due to new industrial and mass-market placements. Gross margins are also increasing due to purchasing leverage of components and operating efficiency improvements.

The Company's overall gross margins in the first quarter declined from 36.9% in 2011 to 35.2% this year, primarily due to a higher proportions of low-margin items.

Acme United changed its corporate banking from Wells Fargo to HSBC during the quarter. The loan was due for renewal within a year, so we evaluated alternatives we felt would be best for the Company. Our relationship with Wells Fargo was excellent, but it appeared to us that it lacked strength in international banking and expertise. HSBC fit our global footprint and provided a relationship team in New York that we believe will add value. The final agreement was an increase in our line to $20 million to $30 million with a five-year term and an interest rate today of about 2%.

We are entering the second quarter of 2012 with a very strong order book of back-to-school items, Clauss tools, Pac-Kit first aid kits and Camillus knives. We continue to provide sales guidance of $80 million to $85 million for the year.

I'll now turn the call to Paul Driscoll.

Acme's net sales for the first quarter were $16.9 million compared to $14.4 million in 2011, a 17% increase. Excluding the impact of Pac-Kit sales increased 9%. Net sales for the first quarter in the US segment increased 19%. Excluding Pac-Kit, net sales in the US increased by 8%, mainly due to higher sales of pencil sharpeners and first aid kits.

Net sales in Canada decreased by 11% in US dollars and 9% in local currency. The majority of the sales decrease was due to new product placements in the first quarter of 2011.

Net sales in Europe increased by 32% in US dollars and 39% in local currency due to higher sales in the mass-market channel. We expanded our efforts and resources in this channel about three years ago and have experienced steady and strong growth. Gross margins were 35.2% in the first quarter of 2012 versus 36.9% in the first quarter of 2011. The lower margin in 2012 was primarily due to unfavorable product and customer mix as well as the added Pac-Kit business. We expect margins to improve in the second quarter with a better mix.

SG&A expenses for the first quarter of 2011 were $5.5 million, or 32% of net sales, compared with $5.1 million or 36% of net sales for the same period of 2011. Most of the SG&A increase was due to higher variable selling costs as a result of higher sales. Operating profit was $458,000 in the first quarter of 2012 compared with $185,000 in the first quarter of 2011.

Net income for the first quarter 2012 was $260,000, or $0.08 per diluted share, compared to net income of $120,000 or $0.04 per diluted share for the same period of 2011.

The Company's bank debt less cash on March 31, 2012 was $12.8 million compared to $13.2 million on March 31, 2011. During the 12-month period, we paid $800,000 in dividends and generated $2.2 million in cash from operations. Inventory increased 1% from March of last year.

Thank you Paul. I will now open the call to questions.

(Operator Instructions). Bill Jones, Singular Research.

Hi guys. Great quarter.

Thank you Bill.

I was wondering. I know you have your annual meeting coming up and you usually give some insight into new products that are coming out. I was wondering if you could give us a little insight into what is exciting this year that we should be thinking about?

Well, there are a number of items that are really going to be impacting us favorably the rest of this year. One of them are the Camillus knives. We introduced the line totally refreshed about this time last year and we have gotten meaningful placement, meaningful for the Company's earnings this year. You will be seeing Camillus in many of the outdoor sporting good chains during this year as well as Wal-Mart. So that will have a favorable impact.

We are shipping and trying to ship more of the less Les Stroud survival tools, which you may number Les Stroud is Survivor Man and for a certain segment of our market, he is very popular. Les Stroud has been placed in many of the outdoor chains and, again, back-to-school -- I mean the time for Father's Day, the summer, the fall, holiday time around Christmas. All of these are area -- times when Camillus said Survivor tools are quite hot.

We have got a Scissor Mouse which we just began shipping. You will be able to find that at Staples chain-wide in the next few days. In some cases, they are in the stores. That will be rolling out into many of the mass-market and office channels during the year. We expect that to be in excess of $1 million of new growth.

[Wes Marine] cutting tools, these are very rust resistant stainless steel knives, pliers, hooker removers, gaffs, they'll rolling through the [Wes Marine] chain as we speak and it is a sizable increase from last year.

The iPoint pencil sharpeners, the new generation is currently in the lineup for back-to-school at a number of the major mass-market accounts as well as Staples and OfficeMax and Office Depot. So there is growth there. When I net all of this up, this is pretty meaningful.

In addition to that, Pac-Kit continues to be gaining share. So we are running on pretty much all cylinders right now.

Excellent, thank you for that. You had mentioned I think in the remarks that the gross profit was 36% in the quarter, and you expected that to be higher in Q2. Would that be true for the year? Should --

No, it's a very tricky thing because although we are able to forecast sales with some confidence, the margins are a little bit difficult because you are trying to assess the mix within the customers. But, the new products that are coming through have meaningful sales, we believe, and they are all well above the current levels of margin. So that's why Paul gave guidance in the second quarter that margins probably will be up from where they are now. My guess is that will be the case for the year.

Have you had success in getting the margin up on the Pac-Kit? I know that was kind of the intention, right, to get it more in line with the other first aid kit sales?

Yes, and part of that is operating efficiency because we are running at a third higher volume than we had been when we purchased the business. We're getting operating efficiencies.

Second, we truly have leveraged the purchasing power of our existing PhysiciansCare first aid kits as well as Pac-Kit volumes. So that is impacting. We saw it in the first quarter and I think it will continue increasing.

Okay, great. Thank you for that. I will drop back and let someone else in the queue. Thanks again.

Richard Dearnly, Longport Partners.

Good morning. Could you talk about what your recent history in terms of production flow and error rates have been and then where are you now? Then, you said that you are trying to ship Les Stroud product. What is the impediment there?

Well, first, our history of production in general is outstanding. I mean we are making millions and millions and millions of items and getting them delivered to our customers with metrics close to 99% first time delivery. So that is excellent.

We are stressing some of the factories because we've got volumes bigger than we have ever had before. And so when I talk for example about trying to ship Les Stroud, of course we are shipping Les Stroud. We've got to ship it. Some of that is on the water right now. It impacts in the second, third quarter, fourth quarter and hopefully for quite a long time.

But I wouldn't worry about production issues. It's really just produce, keep your eyes down and keep driving.

Okay. You talked eloquently about the product lines that are up. Which ones are not doing so well?

Honestly, I can't think of any off hand right now. There's got to be some product lines that are down but we're not really seeing that.

Well, that sounds good. When you said your order book is strong, is that -- were you referring to both back-to-school, which you're booking now, or the new products you sort of called out there?

Well, the back-to-school is going to be a very strong back-to-school. So, we are in production. We are shipping in the second quarter right now and that's doing very well. The new items, again, have been well received to date, so -- because you have to have sellthrough and you have to have reorders, but we've certainly got the initial load-in for these, and they are exciting.

Great. Well, thank you.

[Henry Dreuker], [Dreuker] Capital.

Hi guys. Congratulations on your quarter. I couldn't quite hear. You were talking about SG&A, and I couldn't quite hear it. I think you said you're at 32% of SG&A this quarter, down from the prior year, but you were talking about SG&A. Could you just -- so I could hear that, and then I had a follow on?

Paul, over to you.

I said that SG&A was 32% compared to 36% in the quarter of last year.

Okay. Then what did you say beyond that in terms of you were talking then about the dollar amount of SG&A going up because of --?

The dollar amount went from $5.1 million to $5.5 million, and I said the majority of the increase was due to variable selling costs due to higher sales.

I see, okay. My question is -- and that's great that it's coming down. I have been following this for a while and I'm just kind of curious your thought on it, just your general level of SG&A. What do you think your target could be? I ask that question because other companies in your industry operate at a far less percentage of SG&A to sales.

What we are doing is quite different than the guys in our industry. We are doing a lot of development. You don't see that, but we are doing a lot of it, both in the coatings, the nonstick, the PVDs, the anti-rust treatments that we're doing. You simply don't have that kind of technology in the typical office industry.

The second thing is we do a lot of new product development which, while the margins are little bit down this quarter, in general the new products that are rolling through the rest of this year are all new products that are developed generally internally.

So you have got the expenses of tooling and production and some prototyping and things out doing market research. All of that washes through the P&L. Some tooling gets capitalized but almost everything is washing through. So it's a number that is high relative to our competitors but it's a different business model.

But when you do that tooling and production and prototyping, then would you be manufacturing those new products they are after or do you then use some of your partners and outsourcers in Asia to manufacture them once you have sort of gone done all of the spec-ing of it out?

We do some of the nonstick and titanium coatings internally, and that's the real proprietary thing. When I talk about tooling as an example, it's our tooling that it placed to third parties for manufacture. So -- but usually the tooling is capitalized. However, all the work that goes into that in the development is a little expensive.

I see, I see. So you would not expect -- you would not have a target to try to say we could bring it down several hundred basis points because your model is different from others?

I would guess that as we leverage sales, the SG&A will drop but we are putting money at an increasing rate into new product development. That piece -- I have kept even in the times when sales have fallen off in 2009 and '10 and we're seeing the benefits now. We are just continuing to do that.

I see. Thank you.

(Operator Instructions). Tom Spiro, Spiro Capital.

Good afternoon. The sales in Europe were quite strong, and I was kind of curious whether you expect that to continue this year and perhaps this is the year when Europe breaks into the black? What do you think Walter?

Europe has got some very good mass-market business that is pretty good margin and that is booked and lined up for the year. The office channel there is about flat. The manicure market that we have in Europe is up. So you know, things are pulling together for the European business. I just want to be a little bit cautious about saying, yes, they are in the black because it's such a long time. They're clearly making progress and they were profitable this quarter.

That's great, that's great. How are we doing with our new line of garden tools?

We just had one heck of a big review at a large mass-market retailer, and the guys came back excited, but who knows. We have gotten more placement in some of the smaller mass-market accounts in the US and two large-ish ones in Canada, so it is growing but we have not cracked the garden market the way, for example, we are doing with Camillus knives right now. So we are trying and they're great products, so we are hopeful.

I'm hopeful too. Lastly, Walter, I know, from time to time, we have had unusually high air freight expenses. As a consequence we have tried to boost inventory to avoid some of that. How does that issue stand as we enter the stronger sales period?

We'll probably have more air freight this year than we did last year because we have got so many new products. The Camillus items, the Les Stroud items, some of the [Wes Marine] items all hitting -- Scissor Mouse -- all hitting in the second and third quarters. So the production is running pretty high. But by and large, I don't see it to be a problem for the year, but it will probably be higher than last year just because we have so many new things with volume coming through a very narrow funnel right now.

Thanks and good luck.

Jeffrey Matthews, Ram Partners.

I apologize if these were covered earlier. I was late for the call. Just curious on two things. One is the -- anything in terms of your capitalization related to the debt? Where are you with your bank line? Any negotiations going on? Are you secure there for a while?

Well, you might've missed it, but we announced that we'd entered a new banking relationship. In other words, we completed that about three weeks ago --

Okay, great.

- -with HSBC. So it's a $30 million line instead of $20 million. It's a five-year facility. We save a 0.25 percentage point in the rate. So we are really delighted.

Good. Secondly just costs around the world, any updates on what's happening in China and where you are spreading out your production if anywhere else?

Well, costs in China seem to have slowed a little bit but wages still continue to increase and they tend to be somewhere around the 12% to 14% range, so there's still wage inflation. We won't see it this year for our pricing. It will be next year and our costs are locked in for this year. So that's solid. But wages are still going up.

Inflation is continuing there. It's somewhere around 4%. So we have got our hands full for next year in, again, putting through price increases and trying to get better productivity. Having said that, we are spending a lot more time looking at the productivity with our team in China. If we are successful, we should be able to hold back some of the increases we need to maintain our margins. So I'm optimistic but we have a lot of work to do.

The second thing, moving to the other parts of the world in sourcing, we are moving a little bit more into some sourcing in Italy. We're doing a little bit more in Colombia. We continue to source from Pakistan, but these are not really meaningful relative to China. Our Pac-Kit business and our PhysiciansCare first aid kits are entirely domestically produced and they are growing so -- and they are growing nicely. So, that is helping a little bit in balancing the sourcing. So even today, we are very reliant on China.

Okay. Then just if I could follow up, looking out a few years, what is a normalized gross margin and then operating margin you think for the business? I think your peak operating margin -- or gross margin was 45% a few years ago. It doesn't look like that will come back. But what are your thoughts on a financial model in a few years?

Well, that's a really good question, and it's one that we haven't shared. I'm a little bit cautious about just winging it.

Okay, I understand.

But I think it's fair to say we are not a 45% margin business anymore in part because we've grown a lot and part because the costs of our goods from China have increased very meaningfully in the last four years.

Sure.

The US dollar, although people say that RMB is undervalued, US dollar has lost about I think almost 30% in the last four years. So when you look at our margin compression just from that, it's pretty clear we've been able to push through a great deal of it, but some of it has hurt us in the margin.

The other thing is the Pac-Kit business is lower and that is a growing part of our growing business. but it is below what our average is. But I would hope that we can hold somewhere in the mid-30s% in margin. We do have a lot of new products that are coming through at higher margins. So if we can hit with those, manage our Asian costs, we should be somewhere in the mid-30s%, maybe a little bit higher.

If I may, one more -- you sounded more optimistic about back-to-school than maybe I recall being at this point last year. What is the -- what's your basis for that? What are you seeing out there?

We're just seeing a lot of business. One of our competitors in the ruler business went bankrupt and we gained a bunch of rulers. Now, you think those are commodities and they shouldn't be growing, but when a competitor goes under, well, you're growing, and they are growing nicely. So that was sort of unexpected.

Another area is the iPoint. Today, if you go into Wal-Mart, you'll see several million dollars of that business that is flowing through for back-to-school. We expect a pretty solid -- well, we have a pretty solid placement at OfficeMax and at Staples and at Rite Aid and at Walgreens. So when I'm looking at it, I'm looking at the book of business we have and what we've got orders placed to ship. What I don't know is the reorders, but we have a pretty good feel from previous years what that is, so I'm pretty optimistic about it.

Thanks very much. Good luck.

(Operator Instructions). We have a follow-up question from Richard Dearnly, Longport Partners.

Well, I guess I shouldn't ask the obvious questions since you mentioned that the line -- the new credit line sort of maybe opens up the acquisition potential. I know there are always things rolling around on the back of the griddle. Anything on the front of the griddle?

All those things we're looking at. We haven't announced anything, but the acquisition line -- I just want to be clear -- yes, it's an extra $10 million, but we laid that out with the assumptions that if we hit a doubling of sales in five years, which is what we are trying to do, then is that cash sufficient to do to finance that? The answer is it gets you well along the way. Now, if an acquisition comes along and it moves faster, that's terrific. But really it was let's put a little bit more long-term capital in place and we got it at a very good rate with I think a very good partner.

We have another question from Bill Jones, Singular Research.

Walter, just to follow-up on that, you mentioned the doubling of sales in five years. Would that include acquisitions or are you thinking internally?

Well, acquisitions have been part of what we have done to get to this point. They have been smaller tuck-in acquisitions. My guess is that will be the strategy we continue to employ, but we are getting bigger, so there will be a little bit bigger deals perhaps.

These items we're developing, the new products have basically more than doubled us in the past six years or so. The acquisitions have helped a little bit, but if you take, for example, Camillus, it was an acquisition that we bought the brand for $180,000 plus tax, and this is going to be a multimillion dollar line for us now, all with new products, but Camillus gave us the brand and some of the potential customer base we are now exploiting.

I'm pretty optimistic that our internal generation of products will be moving us a long way towards that growth goal.

Very good. Thank you.

It appears there are no further questions at this time. Mr. Johnsen, I'd like to turn the conference back to you for any additional or closing remarks.

I'd like to thank you for joining us and have a good day. Good-bye.

This concludes today's conference. Thank you for your participation.